UK: Sanctions Update December 2011

Introduction

Our previous sanctions updates are available on the Ince
& Co LLP website atwww.incelaw.comand should be read in conjunction
with this latest update.

There have recently been a number of developments in
international sanctions. Unrest has continued in the Middle East
following the 'Arab Spring' and, in the last few months, we
have seen the fall of the Qadhafi regime in Libya, the worsening of
the humanitarian situation in Syria and the publication of the
International Atomic Energy Agency's ("IAEA") report
on Iran's nuclear programme. All of these developments have led
to changes in the sanctions and restrictions that had previously
been imposed by foreign governments.

The global scope and far-reaching effects of sanctions impact on
all those involved in international trade and shipping regardless
of their role. As such, anyone involved in these industries must
ensure that they assess the impact of sanctions on their proposed
transactions. This is even more important if they are based within
or have links to the European Union and/or United States. Aside
from the legal implications of contravening sanctions, the
reputational damage that can result from negative media coverage
can adversely impact businesses and could lead to investigation by
the authorities.

This article is intended to provide an overview of the recent
events relating to sanctions against Iran and Syria, but is not
intended to be a substitute for thoroughly evaluating and assessing
the impact of sanctions on you or your business.

Iran

On 18 November 2011, the IAEA published its report on Iran's
nuclear programme which linked the uranium enrichment programme in
the country to military development. This has led to growing
international concern that, despite Iran's assertions that the
programme is for peaceful purposes, there is an underlying military
objective. The intended nature of this programme has led to the
imposition of new sanctions by amongst others the EU, UK and US who
have extended their existing sanctions regimes against Iran. The
aim of these measures is to increase the pressure on the Iranian
government to desist from any military development of nuclear
materials and to return to the international negotiating table on
this issue.

We comment below on recent EU, UK and US developments.

European Union sanctions

On 1 December 2011, European Union foreign ministers met in
Brussels to discuss, amongst other matters, the imposition of
sanctions on Iran and Syria (which we comment on further below).
Prior to the meeting, there were suggestions that the EU could ban
imports of Iranian crude oil. Ultimately, however, this restriction
must have been a step too far for a number of Member States and was
not agreed upon, although there has been a suggestion that further
sanctions will be introduced in the near future, targeting
Iran's energy and oil industry.

Following those discussions, on 2 December, EU Regulation
1245/2011 entered into force. It has added 143 entities and 37
individuals to the list of those subject to a freeze of assets and
economic resources in the EU. The restrictions that apply to these
entities and individuals are set out in the main legislation
dealing with Iranian sanctions, EU Regulation 961/2010. The
entities and individuals which have been designated on this
occasion include a large number said to be owned, controlled or
acting on behalf of the Islamic Republic of Iran Shipping Lines
("IRISL"), whilst others are said to be controlled by or
linked to the Islamic Revolutionary Guard Corps ("IRGC").
Funds and economic resources cannot be provided directly or
indirectly to these 'sanctioned persons'.

It should be noted that EU sanctions apply to EU nationals
wherever located in the world and it is, therefore, important that
if you are an EU national, even where you are working for a foreign
company outside of the EU, you comply with the sanctions.

It is vital that those involved in shipping and trade conduct
due diligence on any counterparties to ensure that they have
neither been designated as sanctioned persons nor are they owned or
controlled by a sanctioned person. While entities based in Iran may
be considered higher risk, it is worth noting that the locations of
sanctioned persons in the latest EU legislation includes companies
and individuals based in China, Dubai, Germany, Hong Kong, Malta,
the Marshall Islands, Turkey and Singapore. The international scope
of these designations means that, even where a transaction appears
to have no link to sanctions, the underlying ownership or control
of the counterparty could be in the hands of a sanctioned party and
could give rise to a breach of sanctions if the transaction
proceeds.

UK sanctions against Iran

As of 21 November 2011, the UK Government introduced legislation
under the Counter-Terrorism Act 2008 with immediate effect. This
legislation prohibits persons in the UK financial sector from
entering into, or continuing to participate in, any transaction or
business relationship with banks incorporated in Iran and the
Central Bank of Iran ("the Direction"). It is important
to note that the definition of "financial institutions"
is wide enough to cover authorised insurance companies which would
include entities such as P&I insurers.

The Direction extends to the subsidiaries and branches of banks
incorporated in Iran wherever they are located in the world. The
legislation was introduced because of the authorities' belief
"that the activity in Iran that facilitates the
development or production of nuclear weapons poses a significant
risk to the national interests of the UK" and that
"Iranian financial institutions actively provide many of
the financial services which underpin the procurement of goods and
material from abroad for Iran's nuclear and ballistic missile
programmes". The restrictions are intended to ensure that
the UK financial sector does not unwittingly facilitate the
financing of Iranian nuclear proliferation, given the serious risk
that Iran's activities pose to the UK's national
interests.

Applications for licences to exempt specific
transactions/relationships from the restrictions can be made to the
Treasury. Six general licences are also available in respect
of:

transactions for or related to humanitarian activities or
purposes;

transactions for or related to personal remittances;

transactions related to the provision of insurance which is
permitted under Article 26(2) and (3) of EU Regulation
961/2010;

the holding of asset-frozen Iranian banks' accounts;

the holding of accounts in the names of Iranian banks; and

the completion of payments to/from Iranian banks which were in
progress at the time of the Order coming into force.

Guidance published by HM Treasury notes that this Direction
requires "relevant" persons i.e. financial institutions,
to cease transactions and relationships with designated persons and
goes on to say that exporters are unlikely to be relevant persons
because "the Direction is not intended to serve as a trade
ban with Iranian companies, even though the UK Government does not
encourage such trade". The Guidance does, however,
acknowledge that the Direction will make it harder to trade with
Iran as UK banks would be prohibited from handling payments to or
from banks in Iran unless the Treasury has licensed the
transaction.

In Iran, the events that followed this legislation have led to a
worsening in UK and Iranian relations as the Iranian Parliament
voted to downgrade relations with the UK and protesters
subsequently 'stormed' the UK embassy in Tehran, a move
believed by the UK authorities to have had a degree of Iranian
governmental acceptance. The latest move has seen the UK close its
embassy in Iran and expel all Iranian diplomats from the UK. The
breakdown in relations and the introduction of further sanctions
are likely to make it increasingly difficult to conduct trade
linked with Iran.

US sanctions against Iran*

The US has also strengthened its sanctions against Iran in a
number of ways, most notably for the international business
community through Executive Order 13590 which, like CISADA before
it, has extraterritorial effect.

Executive Order 13590 authorises the US Secretary of State to
impose financial sanctions in the US on any party (including
successors and affiliates) who:

knowingly, on or after the effective date of this order,
sells, leases, or provides to Iran goods, services, technology, or
support that has a fair market value of $1,000,000 or more or that,
during a 12-month period, has an aggregate fair market value of
$5,000,000 or more, and that could directly and
significantly contribute to the maintenance or
enhancement of Iran's ability to develop petroleum
resources located in Iran;

knowingly, on or after the effective date of this order,
sells, leases, or provides to Iran goods, services, technology, or
support that has a fair market value of $250,000 or more or that,
during a 12-month period, has an aggregate fair market value of
$1,000,000 or more, and that could directly and
significantly contribute to the maintenance or
expansion of Iran's domestic production of
petrochemical products; [our emphasis]

The Order is very widely drafted and it is difficult to say with
certainty how the US will interpret what will constitute a
"direct and significant contribution". From the
definitions that are included in the Order it is, however, clear
that "to develop petroleum resources" includes
exploring for, extracting, refining, or transporting by pipeline
petroleum resources.

Perhaps of most concern to those involved in the Iranian
petrochemical industry is the dramatic reduction in the financial
thresholds which apply. The threshold for sanctionable investment
in the development of Iran's ability to develop its petroleum
resources has been cut from $20 million to $5 million, while the
threshold at which sanctions will apply to a person who knowingly
sells, leases or provides goods or services to Iran which will
significantly contribute to the maintenance or expansion of
Iran's production of petroleum products is based on a fair
market value of $250,000 or, during a 12 month period, an aggregate
of $1 million. How these thresholds will be calculated, however,
remains uncertain.

Looking at this legislation, it could be argued that providing
ships to transport Iran's petrochemical products, or the
insurance of such transportation, constitutes a significant
contribution to the maintenance or enhancement of Iran's
ability to develop its petroleum resources. The position, however,
is not clear. In light of this, the International Group of P&I
Clubs has reportedly sought guidance from the US authorities on a
number of issues arising from the Order, including whether the
transportation by sea of petroleum resources into or out of Iran
and the insurance of vessels performing such trades will now
attract sanctions, as well as guidance on how the financial
thresholds should be calculated.

In light of the uncertainties surrounding this legislation, we
strongly recommend that those with specific concerns seek US legal
advice.

Syria

As the pressure on Syria increases with the imposition of
sanctions by the Arab League and continued pressure from other
countries, it is becoming increasingly difficult to conduct trade
with Syria.

European Union Sanctions

Council Regulation (EU) No 950/2011 of 23 September 2011 amends
the main legislation against Syria and adds to the lists of Syrian
persons/entities subject to the EU's asset freeze.

As of 23 September 2011, prohibitions have been introduced on
the granting of any financial loan or credit to, the acquisition or
extension of a participation in, or the creation of any joint
venture with any Syrian person, entity or body involved in the
exploration, production or refining of crude oil. It is also
prohibited to participate, knowingly and intentionally, in
activities the object or effect of which is to circumvent the
prohibitions referred to above. It should be noted that these
prohibitions do not apply to obligations or extensions arising from
contracts or agreements concluded before 23 September 2011.

In addition, Regulation 950/2011 added two persons and six
entities (including Cham Holdings, the largest holding company in
Syria) to the asset freeze. On 13 October 2011, by Regulation (EU)
No 1011/2011, the Commercial Bank of Syria was added to the list of
entities subject to the asset freeze.

More recently, on 2 December 2011, EU Regulation 1244/2011
further expanded the list of persons, entities and individuals
subject to the asset freeze. The two most notable additions are the
Syria Trading Oil Company (Sytrol) and General Petroleum Company
(GPC). The designation of these two entities is likely to impact on
those dealing with oil and petroleum products in Syria. Under the
EU sanctions against Syria (and as with other sanctions
legislation), it is prohibited to make funds and economic resources
available, either directly or indirectly, to an entity that has
been designated as a sanctioned person.

Also on 2 December 2011, the Council of the European Union
introduced Decision 2011/782/CFSP, which enacts further measures
against Syria, including a prohibition on the provision of
(re)insurance to the Syrian government in the EU, restrictions on
the export of key equipment for the oil and gas industry in Syria
and a prohibition on investing or assisting with the construction
of Syrian power plants.

What can you do to protect yourselves?

In brief, there are certain things which you and your business
can do to protect yourselves against breaches of sanctions,
including but not limited to:

carrying out due diligence on the transaction and evaluating
the counterparties involved;

the inclusion of adequate protection in contracts to cover
sanctions and, in particular, a mechanism for contractual
termination should the sanctions change;

the implementation of internal compliance procedures and
policies to ensure that transactions comply with sanctions;
and

training those within the business to understand the risks
posed by sanctions.

Summary

For now, there seems to be little prospect of an end to the
sanctions legislation. If anything, the next few weeks are likely
to see further developments and increasingly stringent restrictions
on trade with Iran and Syria. Against this background, it is
vitally important that all transactions are considered carefully
with the sanctions legislation in mind. Contracts that are entered
into now may well give rise to obligations which are to be
performed later down the line. There is, therefore, a risk that the
sanctions legislation may have changed by the time the obligation
arises, in the worst case making it illegal to proceed or at the
very least making it difficult for you to comply with the contract
(if, for example, licences or authorisations are required). It is,
therefore, advisable to consider these risks when entering into any
contracts for the future performance of work and to try to allocate
the risks accordingly.

It is also imperative to undertake thorough due diligence on any
transactions with a particular focus on the counterparties and,
where there is concern regarding a particular issue, to seek legal
advice or guidance from the relevant authorities.

Footnote

* Note: we are not qualified to advise on US law.
However, we can provide recommendations if you require assistance
from US lawyers.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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